This article is the members-only, part 2 version, of our two part series on attractive high yields from across the capital structure. Specifically, this article highlights 5 increasingly attractive high-yield opportunities including preferred stocks, bonds and common equity. Here is the list...
KNOT Offshore (KNOP), Yield: 9.5%
We’re adding KNOP to our list because of its high yield and its potential for price appreciation. Specifically, this company owns and operates shuttle tankers, a niche industry with attractive supply and demand dynamics, and there are currently only two major players in this space (KNOP is second largest behind only Teekay Offshore (TOO) (more on Teekay later). We initially created this write-up per a request from one of our members, and we believe it presents an attractive high income opportunity as long as you know, and are comfortable with, the risk factors, as described in this members-only report…
1. Nustar Fixed-to-Floating Rate Preferred Stock (NS-C), Yield: 9.4%
Continuing with our fixed-to-floating rate preferred stock theme that we covered in the part 1 (where we highlighted TGP-B), we believe Nustar’s fixed-to-floating rate preferred stock (NS-C) is also worth considering for its high-yield, limited interest rate risk, and improving business.
If you don’t know, NuStar Energy is a master limited partnership (“MLP”) based in San Antonio, Texas. It has more than 9,300 miles of pipeline and 81 terminal and storage facilities that store and distribute crude oil, refined products and specialty liquids.
The shares sold off earlier this year after a Federal Energy Regulatory Commission (FERC) ruling that created uncertainty for much of the industry. Additionally, Nustar reduced the distribution on its common shares (but not the preferreds) early this year (they called it a reset), but in reality this is a good thing for the preferred shares because they’re higher in the capital structure than the common, and the common dividend reduction frees up more cash to support the preferred. Further still, Nustar has since announced expectation-beating earnings, and the business is improving. You can read our full write up on Nustar’s high-yield fixed-to-floating rate preferred shares here.
Nustar has since announced expectation-beating earnings as its niche industry continues to show sings of strength.
2. Teekay Offshore Preferred Shares (TOO-B), Yield: 8.7%
These preferred shares do not have the fixed-to-floating rate characteristic of the other preferreds we’ve covered, but the yield is high, and the business is improving. Teekay Offshore is the other major player in the niche shuttle tanker industry we highlighted when we reviewed KNOP earlier. However, Teekay Offshore is involved in considerably more types of shipping business as well (i.e. more than just shuttle tankers). In our view, the market is still too focused on the challenges Teekay faced in the past, and the company is not getting enough credit for the strong and improving conditions going forward, especially given the financial strength of the Teekay family of companies. You can view our full Teekay write-up here:
3. More Bond Ideas: Seagate, Yield: 5.8%
- Switching gears to fixed income, we have highlighted a variety of attractive bond ideas in this report:
Generally speaking, when we look for bonds, the number one thing is does the company have the financial wherewithal to support the debt. This includes continuing to make the coupon payments and also the ability to pay off or refinance the debt when it matures so investors can be made whole.
One additional specific cash flow characteristic that we like to see is does the company pay a dividend on its common shares because this provides extra cash cushion for the bonds (i.e. bonds are higher in the capital structure than equity, so the company will cut the equity dividend if needed to support the bonds—we like to see this extra cushion).
Beyond cash flows, we like to buy high-yielders trading at a discount to par because that allows for some price appreciations (in addition to the coupon payments) which adds to the total return of our investments. Often times, bonds prices will recover closer to par long before they mature due to stock-specific idiosyncratic factors—if you select them right. One bond from our list available using the above link/button is Seagate (STX). These bonds are offering an attractive yield and trade below par because the market it overly fearful that the cloud is going to put Seagate's hard drive business into bankruptcy overnight. The business has slowed compared to it once was, but hard drives will continue to be used, and Seagate should easilty be able to support these bonds for many years and pay off in full at maturity.
4. Triton (TRTN) Income-Generating Put Option Sales, Yield: +10.2%
As an alternative source of income, investors can collect premium by selling out of the money put options on stocks that they’d be comfortable owning over the long-term. This strategy generates attractive premium upfront, and the big risk is that you end up buying shares (because they get “put to you”) at a very low and attractive price. For example, we recently wrote about this attractive income-generating strategy on Triton International—the leader in intermodal transportation (i.e. the ubiquitous steel boxes found on ships, trains and trucks. You read more about that trading strategy on Triton (and a few others) in this recent report:
5. BlackRock Credit Allocation Income (BTZ), Yield: 6.7%
If the lower credit rating of many of the bonds in our previous fixed income closed-end fund (BIT) made you uncomfortable, then you may want to consider the higher average credit rating holdings in this fund (BTZ). The yield on BTZ is lower, but it’s also less risky if the economy moves from its ongoing “risk on” mode to a “flight to quality” instead. Plus this fund (BTZ) is trading at a particularly large discount to its NAV relative to recent history, which means investors basically get to buy more yield at an even lower price than usual.
This fund has likely sold-off due to investor fear about rising interest rate risk (this fund has a higher duration), but this sell-off (i.e. the bigger than normal discount to NAV) is unwaranted because it is based on supply and demand instead of underlying NAV (remember the actual bond holdings in the fund have already largely adjusted to interest rate risk expectations). This fund also has many other attractive characteristics, such as professionally managed leverage (at lower institutional borrowing rates), a low management fee for a CEF, and it pays distributions monthly. We wrote in more detail about this fund (and several others) early this year in the following report (below), but the main reason it is particularly attractive now is the lower credit spread and the unually large discount to its NAV.
If you are an income-focused investor, it can make a lot of sense to consider opportunities from across the capital structure including preferred stocks, bonds and common equities, such as the examples provided in this article series By searching across the capital structure you have a greater opportunity set to choose from. Additionally, you can reduce your overall risk by building an investment portfolio that includes different types and sectors of investments.
For more attractive opportunities to consider, you can view our current holdings here...